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The Best Dividend Stocks to Buy Right Now

Dividend stocks can be boring, especially when AI-fueled stock gains are proliferating. Still, for long-term investors, buying sustainable dividend stocks with solid growth potential is a timeless strategy.

Two dividend stocks worth buying right now are telecom giant AT&T (NYSE: T) and tech heavyweight International Business Machines (NYSE: IBM).

Wireless and fiber growth

While rival Verizon has been shedding wireless subscribers, AT&T has been consistently growing its wireless customer base. Growth has slowed in recent quarters, the result of a pandemic-era boom fading away, but the company is still producing solid results.

AT&T added nearly 350,000 net postpaid phone subscribers in the first quarter, a solid result in the current environment. Postpaid phone churn dipped down to just 0.72%, its lowest level in at least two years. A combination of consistent customer growth and minimal customer losses has been driving wireless service revenue higher.

AT&T's fiber business is also performing well. AT&T had 8.6 million fiber subscribers at the end of the first quarter after adding 252,000. Average revenue per fiber subscriber has been consistently moving higher, and the company sees a path to grow its fiber network to pass as many as 50% more locations than its original plan. Fiber should be a solid growth driver for many years to come.

AT&T expects to generate free cash flow between $17 billion and $18 billion this year even as it continues to invest heavily in its wireless and fiber networks. The stock is dirt cheap, trading for just 7 times the midpoint of that free-cash-flow outlook, and the dividend is hard to resist.

AT&T hasn't raised its quarterly dividend since slashing it in the wake of the spinoff of WarnerMedia two years ago. Even so, the $0.2775 per-share quarterly payout works out to a dividend yield of about 6.4%. The company plans to reach its debt reduction targets by mid-2025, after which dividend increases or even share buybacks could be on the table.

A return to dividend growth or a share buyback program next year could be the push the market needs to knock AT&T stock out of its rock-bottom valuation. As investors wait for the stock to recover, they can collect a sustainable high-yield dividend that will only eat up about 45% of free cash flow this year.

An enterprise AI leader

IBM has a few things going for it as the tech giant aims to become the go-to enterprise AI platform. First, the company has embraced strategic partnerships with leading cloud providers and other technology companies. These partnerships generate billions of dollars in business annually for IBM, and the company's Watsonx AI platform is being integrated by IBM's partners.

Second, IBM's consulting business can provide a complete solution to customers who not only want AI software but also guidance and implementation services. IBM's consulting arm can craft solutions combining IBM's products and services as well as the products and services of its strategic partners. The majority of AI-related business for IBM so far has been on the consulting side, a testament to the importance of consulting to IBM's business model.

While AI is still a small contributor to IBM's revenue, it has the potential to accelerate growth in the years ahead. As it stands today, IBM has returned to consistent, albeit modest, revenue and free-cash-flow growth. The company expects revenue to expand by a mid-single-digit percentage, excluding currency, this year, with free cash flow of about $12 billion.

Like AT&T, IBM's dividend growth has been slow in recent years. The company recently boosted its quarterly dividend by less than 1% to $1.67, which works out to a forward dividend yield of 3.9%. The dividend will consume about half of IBM's free cash flow this year, so quicker dividend growth will likely require quicker free-cash-flow growth.

AI could be the key to accelerating IBM's free-vash-flow growth in the years ahead as the company wins over enterprise AI clients. Until then, investors can collect a nice dividend every quarter.

Should you invest $1,000 in AT&T right now?

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Timothy Green has positions in AT&T and International Business Machines. The Motley Fool recommends International Business Machines and Verizon Communications. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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